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Types of bonds


Floaters

Floating-rate bonds are characterised by the fact that their interest rate is adjusted to current interest-rate levels on a regular basis (every three, six or twelve months). The issuer determines the reference rate and in some cases a spread ahead of time and notifies investors of these conditions. The creditworthiness is also a key factor in determining the spread. The lower the rating, the larger the spread. The terms and conditions of the bond issue may provide for the spread to be adjusted in the event of a change in the issuer's credit rating.

Floaters come in the following variations:

Criterion Description
Bond with a minimum interest rate (floor floater) The floating interest rate cannot fall below a certain minimum (floor). This ensures that investors receive a minimum interest rate.
Bond with a maximum interest rate (capped floater) Floating-rate bonds with a maximum interest rate have an upper limit (cap) which the coupon cannot exceed. These are the opposite to floor floaters.
Bond with a minimum and a maximum interest rate (mini-max floater, collared floater) Floating-rate bonds with a maximum and a minimum interest rate have upper and lower limits which the variable interest rate cannot go beyond.
Reverse floater (inverse or bull floater) Floating-rate bonds whose interest rate is determined by the difference between a fixed rate and a reference rate. When the reference rate rises, the coupon of the reverse floater goes down and vice versa (e.g. 10% minus 3-month LIBOR). The investor's interest income increases when the reference rate drops.